EchoStar-Hughes shot down at FCC

Decision opens door to News Corp. to resume bidding

By

LuisaBeltran

WASHINGTON (CBS.MW) -- Federal regulators moved Thursday to block EchoStar Communications' proposed $16.1 billion acquisition of DirecTV, paving the way for a new buyer to step in.

In its 4-0 vote against the deal, the Federal Communications Commission agreed that letting the two satellite-TV giants combine would effectively reduce competition and "result in less innovation and fewer benefits for consumers," Chairman Michael Powell said.

The decision marks the largest proposed deal to be rejected by regulators since President Bush came into office in 2001. The FCC ruling is also the biggest media merger to be referred to an administrative law judge in 30 years.

"The combination of EchoStar and DirecTV would have us replace a vibrant competitive market with a regulated monopoly," Powell said. "This flies in the face of three decades of communications policy that has sought ways to eliminate the need for regulation by fostering greater competition."

The Justice Department's antitrust division is similarly poised to oppose the pact, a source has told CBS.MarketWatch.com. That rejection would effectively be the final nail in the coffin of the controversial deal.

A Justice Department spokesman declined comment Thursday.

Stock reaction

On Wall Street, shares of EchoStar dropped 3 cents, or 0.2 percent, to close at $16.97 Thursday, while GM gained $2.11, or 6.8 percent, to $33.12. News Corp., which last year dropped out of the bidding for DirecTV, gained 90 cents, or 4.8 percent, to $19.80.

In a joint statement, GM, Hughes and EchoStar said they were disappointed with the FCC decision. "We will continue to work aggressively within the contexts of the FCC process to achieve approval of the merger," the companies said.

An administrative law judge will now hear EchoStar and Hughes' merger application, the FCC said. A date for the hearing has not been set but is expected in 45 to 90 days, a spokeswoman said.

EchoStar's proposal has faced considerable opposition since it was announced late last year. DirecTV is the No. 1 U.S. satellite TV provider, ahead of EchoStar's own Dish Network.

Earlier this week, EchoStar
DISH, -2.60%
and Hughes
GMH
asked the FCC to put off to Oct. 28 a decision on the pending deal as they discussed possible "major revisions." Justice Department antitrust officials are still reviewing the deal and they have an Oct. 28 meeting scheduled with EchoStar.

When asked what proposals EchoStar and Hughes had made, FCC spokesman W. Kenneth Ferree said: "They didn't make any proposals. All they asked us to do is wait."

Even if the Justice Department were to support the deal, it would still be blocked, Ferree said. "We refuse to transfer the licenses," he said.

Murdoch back?

The FCC's decision is an apparent win for News Corp.
NWS, +0.00%
which walked away from a year-long campaign to acquire the company after being outbid by EchoStar's Charlie Ergen.

News Corp.'s Rupert Murdoch said recently he would be interested in taking a look at DirecTV if it became available once again. "Clearly, the FCC applied the pertinent law and fact to the proposed merger and concluded that the deal would not be in the public interest," News Corp. said in a statement after the vote.

Regulators have balked at the merger because it would narrow the number of satellite-delivered pay TV companies to two. The other is Pegasus Communications, a smaller rival that primarily serves rural markets.

The FCC said the deal would harm competition in the multichannel video program distribution market and outweigh any benefits resulting from the transaction.

It was unclear whether EchoStar and Hughes would resubmit a proposal tailored to win regulatory approval. The companies have 30 days to file a new or amended application.

Analyst Steve Mather, of Sanders Morris Harris, said EchoStar and Hughes would likely try again but wouldn't be able to satisfy either the FCC or the Justice Department. "This is a pretty significant body blow but the saga will go on," Mather said.

The FCC's Ferree said the commission would consider any new proposal or amendment but that he doesn't see a "quick fix."

Attorney Charles Biggio, antitrust partner with Akin, Gump, Strauss, Hauer & Feld and former acting deputy assistant attorney general for merger enforcement at the Justice Department, said that EchoStar doesn't have enough time to get the deal approved before a Jan. 21 deadline. According to the EchoStar-Hughes merger agreement, Hughes can terminate the transaction by that date if it fails to get regulatory approval, Biggio said.

EchoStar faces considerable hurdles, including a hearing before an administrative law judge and a likely veto from the Justice Department.

"EchoStar's problem is getting Hughes to stay with the deal long enough and perhaps forgo a breakup fee," Biggio said. "Between now and Jan. 21 it is virtually impossible for the FCC to reverse itself. There is not enough time."

Breakup fee in contention

On Wednesday, DirecTV CEO Eddy Hartenstein said that the companies could abandon their plans if they don't get approval by Jan. 21. See story

If they fail to get approval, EchoStar may have to buy PanAmSat and pay Hughes, which is part of General Motors
GM, -2.10%
a $600 million breakup fee.

Ergen may have to pony-up the $600 million unless he can come up with other grounds to terminate the agreement, Biggio said. But Hughes has to decide, if they do choose to walk away, whether they will look to sell to another buyer at a reduced price, he said.

Hughes shares, which closed Thursday off 25 cents to $8.15, have dropped nearly 54 percent from their year high of $17.55.

EchoStar CEO Ergen, speaking at a satellite industry conference this week, said it was unclear who would have to pay the breakup fee and that it depended on the circumstances.

That has prompted speculation that Ergen may try to get out of paying the fee. Ergen may also try to pay a lower price for PanAmStat or break the agreement altogether.

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